How Crypto Market Making Works (And When It Needs a License)

When you click Buy Bitcoin on an exchange app, someone stands ready to sell it to you at the price the screen shows. That counterparty is a crypto market maker. They earn the gap between what they buy at and what they sell for.

If you are a crypto founder, token issuer, or trading operator who wants to run a market-making operation or contract liquidity, this is your overview: how market makers make money, how the two liquidity models work (centralized order books and decentralized AMM pools), and where crypto market making crosses into licensed activity under MiCA, the SEC, the FCA, and MAS.

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How market makers earn through the bid-ask spread

A market maker posts a bid (what they pay to buy) and an ask (what they charge to sell) at the same time. The spread between them is the market maker’s compensation for holding the inventory.

Example for one Bitcoin:

• Bid: $99,900
• Ask: $100,100
• Spread: $200

If the market maker buys at the bid and sells at the ask, they make $200 minus trading fees. In practice, the inventory sits for a period, so the market maker also carries price risk, position-size risk, and volatility risk.

Spreads are thin on liquid assets. Bitcoin spreads often sit under $10. Small-cap tokens can have spreads of 2 percent or more. The market maker earns a small amount on many trades, not a large amount on one.

Who the major crypto market makers are

Three firms (Wintermute, GSR, and DWF) rank among the largest crypto market makers.

Wintermute builds its edge through algorithmic pricing. It posts quotes across 60-plus venues and routes orders through its own OTC desk. Wintermute describes itself as a leading algorithmic trading and liquidity provider for digital assets.

GSR Markets operates OTC desks alongside programmatic execution. It supports token launches and manages risk for issuers who need liquidity at launch. GSR provides OTC trading, market making, and treasury management services.

DWF Labs trades spot and derivatives on over 60 exchanges. It also runs a venture arm that invests in early-stage token projects, then market makes their tokens after listing. DWF describes its parent, Digital Wave Finance, as one of the world’s largest high-frequency cryptocurrency trading entities.

Scale also brings enforcement visibility. In October 2024, the SEC and DOJ charged Gotbit, ZM Quant, and CLS Global with wash trading. Those firms generated artificial volume by trading against themselves across exchanges. The charges are a warning: market making becomes regulated once it serves clients or handles their money.

Centralized versus decentralized liquidity models

The two models solve the same problem. They use different mechanics.

Centralized exchanges (Binance, Coinbase, Kraken, OKX) use order books. Buy and sell orders stack on either side of a price. A market maker posts a bid and an ask. A matching engine pairs them with incoming orders. The market maker’s quote stays in the book until someone takes it or the market maker cancels it.

A market maker on a CEX sends signed API messages to the venue. The venue runs a centralized matching engine. Settlement happens through the exchange’s internal ledger. Withdrawals and deposits move on and off the blockchain, but the order book itself lives on the exchange’s servers.

Decentralized exchanges use automated market makers (AMMs). Uniswap brought the constant-product formula to wide adoption. The formula keeps the product of the pool’s two token reserves constant (before fees), which fixes the price. A liquidity provider deposits a pair of tokens into a smart contract and earns a share of swap fees. There is no order book. There is no counterparty to hit.

The difference is who stands on the other side of the trade. On a CEX, an institutional market maker fills the order through the book. On a DEX, the trade executes against a smart contract pool funded by liquidity providers. See also our CEX vs DEX comparison for how the regulatory treatment differs.

The cost most decentralized liquidity providers ignore

Liquidity providers on AMMs earn swap fees. They also bear a hidden cost called impermanent loss.

Here is how it works. A liquidity pool holds two tokens in equal dollar value. When prices move, the pool rebalances automatically. If token A rises sharply against token B, the pool sells token A as it goes up and buys token B. The liquidity provider ends up with more of the cheaper token and less of the appreciating token.

Compared to simply holding both tokens, the liquidity provider now has lower total value. That gap is impermanent loss. It stays “impermanent” only if prices return to the entry ratio. If they do not, the loss becomes real when the provider exits.

LPs earn trading fees, but they absorb market divergence risk. A pool with 100x fee revenue can still lose money if impermanent loss exceeds the fees. Active risk assessment is required, not just a deposit and forget.

Stablecoin pools on Curve or Convex are the exception. Their prices move together, so impermanent loss stays near zero. That is why they attract the deepest liquidity.

When crypto market making needs a license

Market making by itself is not universally licensed. But adding client-facing activities, custody, or regulated instruments pulls the operation into regulatory scope.

Regulators look at functional activities, not corporate titles. A firm that calls itself a “market maker” but never touches client money stays exempt. A firm that calls itself “technology infrastructure” but holds client funds does not.

The triggers that change the equation:

a. Dealing on own account with clients

This means taking the other side of client trades directly, not through an anonymous order book. An OTC desk that quotes prices to named clients and settles off exchange is dealing on own account with clients.

b. Executing client orders

Routing or matching third-party trades through your own system puts you in the broker or execution-service business.

c. Handling client funds and custody

Holding user fiat or crypto during settlement, even briefly, triggers custody rules.

d. Operating exchange infrastructure

Running a matching engine or an internal order book for third parties means operating an exchange.

e. Trading regulated assets

Tokens classified as securities, derivatives, or tokenized real-world assets pull the activity into securities or futures regimes.

Each trigger maps to a regime. The EU looks at MiCA for crypto services and national laws for securities and banking. A CASP authorization under MiCA covers exactly 10 crypto-asset services defined in Article 3. But each firm is approved only for the specific subset it needs, not all 10 by default. The US looks at the Securities Exchange Act, the Commodity Exchange Act, and state money-transmission laws.

What stays exempt

Two categories of activity typically stay out of licensing scope.

a. Pure proprietary trading

Trading only with the firm’s own capital on third-party exchanges. No client funds, no third-party orders, no OTC desk. An automated bot that reads API feeds and trades against its own balance sheet is proprietary trading. It does not need a market-making license. See our crypto proprietary trading explained guide for the full breakdown.

b. Protocol liquidity provisioning

Supplying liquidity into permissionless AMM contracts. This stays exempt provided the underlying tokens are not classified as regulated securities in the operating jurisdiction. Deposit tokens into a Uniswap or Curve pool from a wallet, and no license applies. Deposit a security-token into the same pool, and the custody and trading rules apply.

The exemption depends on the token, not the smart contract. A project that mints an ERC-20 and adds it to a DEX pool stays clear of MiCA only if the token is not a utility token under MiCA or a security under local law.

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The regulatory picture as of 2026

Regulatory attention on market making has intensified. The MiCA transition deadline and recent enforcement actions show regulators now treat client-facing liquidity as licensed activity, not proprietary trading.

MiCA transition ends. The MiCA transitional period for crypto-asset service providers ended on July 1, 2026. After that date, any entity providing crypto-asset services to EU clients without a MiCA CASP authorization is in breach of EU law. ESMA set the deadline clearly.

The first institutional liquidity provider to convert was B2C2. B2C2 Europe S.à r.l. received a CASP license from Luxembourg’s CSSF. It is the first OTC liquidity provider authorized under MiCA, and it can now passport services across all 30 EEA states. Before the license, B2C2 operated as a VASP in Luxembourg from 2024.

In the US, Wintermute crossed the line the other way. Wintermute USA LLC registered as a broker-dealer with the SEC and FINRA in August 2026. The registration lets it trade equities and equity options. It also acts as an authorized participant for exchange-traded products, and self-clears digital asset securities transactions for its own account. It is a proprietary trading operation, not a retail broker.

In the UK and Singapore, GSR Markets holds both sides. GSR Markets UK is registered with the FCA as a cryptoasset business under the Money Laundering Regulations (FRN 1018980). GSR Markets Pte. Ltd. holds a Major Payment Institution license from MAS, covering its OTC and programmatic execution services in Singapore.

Enforcement is active. The October 2024 charges against Gotbit, ZM Quant, and CLS Global show how regulators treat unlicensed client-facing activity. ESMA’s Market Abuse Regulation and the SEC both monitor wash trading and order-book spoofing in digital asset markets.

Structuring market making for compliance

Corporate boundaries matter. Mix proprietary trading, protocol liquidity, and client-facing brokerage in one legal entity, and one regulatory bucket can contaminate the others.

Keep them separate. A proprietary hedge fund, a protocol-owned liquidity pool, and a client-facing brokerage desk should sit behind different entities. That way, a compliance failure in one does not spill into the others.

If you are launching a token project, contracting institutional liquidity, or setting up a proprietary desk, the regulatory architecture depends on which bucket you step into. The license type follows the function, not the name. See our MiCA licensing guide for how the EU authorization works in detail.

How LegalBison helps with market making operations

We help crypto market makers and token issuers map their activity to the right regulatory structure. We identify the triggers that pull a desk into licensed territory and secure the authorizations that fit the model.

Our services cover the full cycle:

• License application for CASP, VASP, and broker-dealer authorizations across the EU, UK, Singapore, UAE, and other jurisdictions
• Corporate structuring to separate proprietary trading, protocol liquidity, and client-facing services
• Market-making agreements (MMAs), token loan agreements, and OTC contracts reviewed for regulatory risk
• Compliance systems: AML/KYC, market abuse surveillance, and token classification

Schedule a free consultation to review your market-making structure. We handle company formation, licensing, and compliance as a single coordinated project. See the full legal services scope.

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